Marketmind: Fed leaves shoe dangling in policy parade

A look at the day ahead in U.S. and global markets by Mike Dolan

Central banks line up across the world on Thursday to deliver updated policy settings but global markets sulked at the Federal Reserve’s refusal to sound an all-clear on rate hikes as it left one last move this year on the table on Wednesday.

At least eight major central banks are meeting on Thursday.

Both Swedish and Norwegian central banks have already announced further rate rises, as expected. Although the Swiss National Bank paused just like the Fed and bolstered liquidity to its banks, it also said more hikes may be necessary.

Following Wednesday’s surprise drop in British inflation, markets are now split on whether the Bank of England will pull the trigger one last time later today or signal the end of the whole campaign here at a peak rate of 5.25%. Central banks in South Africa and Turkey are also meeting.

But, as so often, it’s the Fed that casts the biggest shadow.

In what many dubbed a ‘hawkish pause’ in its tightening campaign that drummed home the ‘higher for longer’ message, the U.S. central bank upgraded its view of growth, jobs and policy rates through 2024 – and a majority of policymakers indicated they still favour one last rate hike this year to 5.5-5.75%.

Wall St took it badly and stock futures remain in the red on Thursday. The fell almost 1% to its lowest level of a rough September so far, with tech stocks taking the brunt of the selling and the NYFANG index of 10 megacap digital and tech giants off more than 2% – its biggest daily swoon in almost a month.

The volatility gauge closed above 15 for the first time this month and climbed further pre-market on Thursday. Asian and European bourses all fell sharply too.

The sour mood in equities emanated from a further repricing rates and bond market.

Futures now show the implied Fed policy rate for the end of next year at a new cycle high of 4.85% – up a whopping 35 basis points in just over a week. And that’s still a quarter point below where Fed policymakers indicated they would be by then – and just 50bp below the ‘peak rates’ later this year.

The reason? Fed officials still don’t see inflation back to their 2.0% target until 2026. As the economy dodges recession and unemployment stays low, Chair Jerome Powell said the Fed needs ‘convincing evidence’ its policy stance is bringing inflation back to target.

Goldman Sachs said it now expects Fed easing to start as late as the fourth quarter of next year, six months later than an earlier forecast for a first cut in Q2.

“(Fed) participants appeared to move away from the view that monetary policy tightening could weigh on growth with a long lag next year, which weakens one argument for cutting,” wrote Goldman economist Jan Hatzius.

Others, such as Institute for International Finance chief economist Robin Brooks, think the Fed is simply trying to prevent bond markets loosening prematurely and running away with the prospect of rate cuts ahead once a peak rate is assumed.

“It’s just expectations management,” Brooks said.

If so, it appears to be working.

The Treasury market – bracing for another heavy diary of new debt sales next week – seemed in no mood to fight the Fed.

Two-year Treasury yields topped 5.2% on Thursday for the first time since 2006 – up 32bp this month alone. Ten-year Treasury yields hit 4.5% for the first time in almost 16 years.

The only solace was that it knocked back restive prices even further. US crude futures dropped back below $90 per barrel for the first time in more than a week – down almost 6% from Tuesday’s highs.

With many of the other central banks hesitating even as the Fed hangs tough over the horizon, the dollar zoomed to six month highs. The SNB’s pause and the prospect of the BoE stalling later too meant the Swiss franc and sterling led the way lower against the pumped up buck.

Key developments that should provide more direction to U.S. markets later on Thursday:

* Bank of England policy decision; South Africa Reserve Bank policy decision, Central Bank of Turkey policy decision. European Central Bank President Christine Lagarde speaks

* Philadelphia Fed’s September business survey, U.S. weekly jobless claims, U.S. Aug existing home sales, U.S. Q2 current account estimate. Canada Aug new house prices

* U.S. corporate earnings: Darden (NYSE:), Factset

* U.S. Treasury auctions 10-year inflation protected securities, 4-week bills